Tension between the US and North Korea is escalating and the effects have started to be felt in the global markets. As a result of the tension, volatility has affected global markets and this may have you wondering why this happens.
Well, war is known to confuse investors thus raising uncertainty. Even though thinking about our portfolios is not at the top of the list when war starts, its impact on the stock market cannot be missed. What you ought to know is that war can magnify or mitigate investors’ returns.
Furthermore, the uncertainty in stock markets may increase inaccuracy of stock price which ultimately lowers the prediction of future price movement.
What really happens is that in case of a crisis, sellers will panic and begin offloading their portfolios so as not to suffer huge losses. Majority of investors and traders don’t know that selling in the wake of a crisis is not advisable.
Furthermore, they will opt to invest in gold, Swiss currency and similar products since they are deemed to be stable during conflicts.
Starting from the Pearl Harbor attack which happened in December 1941, US stock markets have been facing a median one day decline at 2.4%. These shocks arose during the 1962 Cuban missile crisis where the economic shock lasted for 8 days leading to 7.4% in total losses.
If you follow similar patterns for example Middle Eastern conflicts including Desert storm in 1991, the Iraqi War in 2003 and Syrian Conflict from 2011, you will find out that market prices and trading activity dropped.
What is an economic shock? This refers to an event that has the effect of producing changes within an economy. They are known to be unpredictable thus they do impact supply and demand forces. In case of rising tension like the one between US and North Korea, short term shocks will be experienced.
Its effect will include short term consequences on global markets and the economy for countries within the vicinity of the conflict. If the conflict turns into a war, the consequences will have a lasting effect on global markets and the economy.
According to economic experts, a country will suffer supply shock. This is where the supply of goods, services or labor will decline impacting economic productivity. Factors leading to supply shock include economic sanctions, manufacturing destruction and damage to infrastructure among others.
Inflation is another consequence of international conflict which results in the increase of prices for goods and services. This results in the reduction of purchasing power.
Economists attribute this to the rise in input prices, consumers’ inability to purchase goods, decline in revenue and profits. If the situation continues, the economy will slow down.
So how does inflation affect the stock market?
As said earlier, the effects of inflation will result in the rise of input prices. This will in turn contribute to companies spending more on raw materials and production. To ensure survival, the companies will have to pass the burden on to the consumers.
Due to the rise in the price of goods and services, consumers will be acclimated by the new price movement resulting in the expenditure of more cash. This is because consumers will not hold the cash due to its decline in value as a result of inflation.
As you can see, the consequences of inflation will confuse investors who may in turn panic and start selling. This will lower the stock price of different instruments.
It can be said that stocks have a mixed record especially when it comes to international conflicts.
Sample this! In the summer of 1990, three weeks before the Gulf War, stocks dropped by 13.3%. When the tragedy of September 11, 2001 occurred, stocks dropped sharply by 15% and when the US invaded Iraq, stock rose by 2.3 %.
Here is what you need to know – the talk of war is not the same as war itself so don’t overreact.
As an investor, there is no road map to follow when it comes to war but in the event the market experiences a strong selloff then it may be a great time to get some stocks on sale and get a better cost average on your long-term positions.